How does life insurance reduce inheritance tax?
Discussing tax and other money related bits can understandably feel daunting for a lot of people, especially when it comes to life insurance (which is already kind of a difficult topic for most people). Hopefully, we can answer some of the top asked questions about life insurance and how it can reduce inheritance tax!
What is inheritance tax?
To be on the way to understanding how inheritance tax can affect your life insurance policy, you kind of need to know what it is first.
Inheritance tax is a type of tax that is payable by a person who inherits money, property, assets or possessions from a person who has passed away.
What has inheritance tax got to do with life insurance?
People switch off when tax is talked about (we understand, it’s pretty boring) but there are some bits you might want to pay attention to, especially if you have a life insurance policy or if you’re thinking of getting one!
When you pass away, your life insurance policy may be subject to inheritance tax if it forms part of your estate.
The facts and figures
When it comes to the numbers, let’s not over complicate things. The standard rate of inheritance tax is 40% and the only part of your estate that will be taxed is the value of your estate that is above your tax-free allowance.
One of the key ways you can ensure you don't face an unnecessarily high inheritance tax bill is to make sure your policy is placed in trust because by doing that, the proceeds are kept outside of your estate and free from inheritance tax (IHT).
How does a trust help you mitigate inheritance tax?
Put simply, a trust for your life insurance will help mitigate inheritance tax by ensuring the pay-out is separate to your estate. All this means is, if the worst were to happen, the pay-out from your life insurance policy would go straight to your beneficiaries and not into your estate with the rest of your money, possessions and property.
Trusts, trusts, trusts!
If you’ve already taken out a life insurance policy but you haven’t yet placed your policy into trust, you should consider doing so . Putting your life insurance policy in trust has so many benefits, one of which is helping to to mitigate inheritance tax.
A trust form is a type of legal agreement that allows you to set out who will receive the pay-out from your policy (the beneficiary/ies), if the worst were to happen.
In this form, you will also decide who would manage your trust (the trustee/s). They will become legally responsible for the management of the trust and would be personally responsible for distributing the pay-out from your policy once it has been paid into the trust, if you passed away.
How do you complete a trust form?
Don’t worry about completing them - we have a whole team dedicated to helping you with that! At Caspian, our in-house trust team is on hand to help you with your trust form. It doesn’t matter how long ago you set your cover up or which provider you’re with - we can help.
Our team will go through the forms with you and run through the different sections and either pop in your answers for you or guide you on how to write them.
What if I can’t find my trust forms?
If you can’t find your life insurance trust forms or the ones you have are old, then we can just post or email you new ones, depending on your circumstances and preferences.
Then when you’re ready to go through everything, one of our friendly trust team can run through the forms with you, either over the phone or via email or text (whichever you’d prefer).
To find out a bit more about our trust team please click here and if you want to start your life insurance quote then please click the button below to get started today.
*Accurate as of the 2022/23 tax year
